Debt-ceiling deal ignores US debt time bomb

[June 05, 2023]  By David Lawder and Andy Sullivan

WASHINGTON (Reuters) - Republicans and Democrats are touting a hastily-written debt ceiling deal that staves off a devastating U.S. default, but does little to slow a massive buildup of total federal debt now on pace to exceed $50 trillion in a decade.

The deal's first problem, budget experts say, is it only curbs non-defense discretionary spending, or just about one-seventh of this year's $6.4 trillion federal budget. Defense, veterans' care and big-ticket safety-net programs are spared.

Longer term, it fails to alter the U.S.'s chronic and growing revenue shortfall, thanks to health and retirement spending on the country's aging population and Congress's failure to raise taxes.

"If you're worried about the deficit and debt problem, this thing does nothing," said Dennis Ippolito, a public policy professor and fiscal expert at Southern Methodist University.

"What you've got in place is essentially Democratic spending policy and Republican tax policy, and there is nothing in the works that suggests any change to either of those," he said.

The deal to suspend the $31.4 trillion debt ceiling until January 2025 holds non-defense discretionary spending largely flat this year, with a 1% increase in fiscal 2024.

The Congressional Budget Office (CBO) estimates this would result in $1.3 trillion in savings over a decade.

Even those savings may prove illusory, as Congress would be free to abandon its self-imposed spending limits within two years. On top of that, tax cuts passed by Republicans in 2017 expire on schedule in 2025, but the party is pushing to extend them.

Making matters worse, higher interest rates are pushing up the government's debt service costs. CBO projects that these will triple to $1.4 trillion by 2033 -- far exceeding the projected defense budget at that time.

SOCIAL SECURITY, MEDICARE OFF LIMITS

In their debt limit negotiations, both President Joe Biden and House of Representatives Speaker Kevin McCarthy vowed not to touch the main driver of U.S. debt: rising Social Security pension and Medicare health benefit costs.

Social Security costs are projected to increase by 67% by 2032, and the Medicare health program for seniors will nearly double in cost during that period, according to CBO, as Americans 65 or older top 46% of the U.S. population, up from 34% this year.

Together, these two programs account for roughly 37% of current federal spending and are both on a path toward insolvency in about a decade. Other programs for veterans and low-income people push such safety-net spending to over half the budget.

Unlike discretionary programs, which are given a fixed amount of money each year, these "mandatory" programs pay benefits to all who qualify for them. CBO projects the government will spend $6 trillion on mandatory spending programs in the 2033 fiscal year, up from $4.1 trillion this year.

To start to shrink debt, the International Monetary Fund has recommended that the U.S. cut Social Security and Medicare costs with higher eligibility ages, means testing and other restrictions.

But Washington policymakers aren't discussing such options, especially heading into the 2024 presidential election.

There is a simple reason for this: they are popular with the public, in part because they are available to nearly everybody and form a lifeline for many U.S. seniors. A January Reuters/Ipsos poll found 84% of Democratic voters and 73% of Republican voters opposed reducing spending on the two programs.

U.S. President Joe Biden speaks on his deal with House Speaker Kevin McCarthy (R-CA) to raise the United States' debt ceiling at the White House in Washington, U.S., May 28, 2023. REUTERS/Julia Nikhinson/File Photo

HIGHER TAXES, NOT JUST ON THE WEALTHY

U.S. tax revenues are among the lowest among wealthy OECD countries and should be increased, some budget experts say.

"The pure math of the federal budget is such that there has to be action on the revenue side," said Nigel Chalk, the IMF's Western Hemisphere Department acting director.

That is not likely in the next several years. Biden was unable to get many of his proposed tax hikes passed last year, when his Democrats controlled both chambers of Congress, and Republicans who now control the House of Representatives say they are out of the question.

Biden's proposal would raise taxes on the wealthy and corporations while sparing those earning less than $400,000 from tax hikes, a carve-out that the IMF says is "unfeasible."

Brian Riedl, a fellow at the conservative Manhattan Institute, has estimated that the full menu of Democratic-backed tax hikes would not balance the budget over 10 years.

The IMF suggested higher tax rates on corporations and wealthy individuals as well as revenue raisers well outside of the normal Washington fiscal debate: broad-based consumption taxes, carbon taxes and cutting long-cherished tax breaks for employer-provided health care benefits, mortgage interest and gains on sales of primary residences.

Linda Bilmes, a Harvard Kennedy School professor and former Commerce Department finance officer who helped achieve the last balanced budgets at the turn of the millennium, said the deal ignores a growing array of tax breaks that are routinely extended with little debate.

"We have $1 trillion in tax expenditures which stop money coming in, that are very, very targeted to the 'haves' of society. We haven’t even glanced at that in this agreement," she said.

NEW WAY FORWARD?

Fiscal experts believe making painful changes to spending and revenues will require a new bipartisan fiscal commission that is given the authority to revamp a broken budget process that was last updated in 1974.

These have had marginal success. A 1983 commission led to payroll tax and retirement age increases for Social Security. In 2010, when the federal debt was $13.5 trillion, the bipartisan Bowles-Simpson Commission recommended $4 trillion in 10-year deficit reduction through tax hikes and spending cuts. But the plan failed when then-president Barack Obama declined to endorse it, setting up Congress for the debt ceiling battle of 2011.

A new commission would need to go further, changing the unwieldy fiscal committee structure in Congress and possibly replacing the debt ceiling, Bilmes said.

That limit "doesn't force some kind of Hamiltonian thoughtfulness around how we allocate resources in society. It is just a gun to the head."

(Reporting by David Lawder and Andy Sullivan; Editing by Heather Timmons and Nick Zieminski)

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